Attached files

file filename
EX-32 - EXHIBIT 32 - Anchor Bancorpancb10-q2018930exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorpancb10-q2018930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorpancb10-q2018930exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the transition period from _____ to _____
 
Commission File Number: 001-34965
 
ANCHOR BANCORP
 
(Exact name of registrant as specified in its charter)
 
Washington  
  26-3356075
(State or other jurisdiction of incorporation 
(I.R.S. Employer
or organization) 
I.D. Number)
 
 
601 Woodland Square Loop SE, Lacey, Washington
98503
(Address of principal executive offices) 
(Zip Code)
 
 
Registrant’s telephone number, including area code:
  (360) 491-2250
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐    Non-accelerated filer ☐ Smaller reporting company ☒  Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No [X]




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of November 5, 2018, there were 2,484,030 shares of common stock, $0.01 par value per share, outstanding.




ANCHOR BANCORP
FORM 10-Q
TABLE OF CONTENTS
 
                                                                                                                   
                                                                                                                        
As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to Anchor Bancorp and its consolidated subsidiary, unless the context indicates otherwise.  When we refer to “Anchor Bank” or the “Bank” in this report, we are referring to Anchor Bank, the wholly owned subsidiary of Anchor Bancorp.



PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)
 
September 30, 2018
 
June 30, 2018
ASSETS
 
 
 
Cash and cash equivalents
$
50,546

 
$
17,568

Securities available-for-sale, at fair value, amortized cost of $17,586 and $18,407
16,817

 
17,725

Securities held-to-maturity, at amortized cost, fair value of $3,188 and $3,500
3,287

 
3,584

Loans held for sale
999

 
98

Loans receivable, net of allowance for loan losses of $4,420 and $4,370
369,291

 
392,044

Bank owned life insurance investment, net of surrender charges
20,675

 
20,546

Accrued interest receivable
1,424

 
1,423

Real estate owned ("REO"), net
742

 
737

Federal Home Loan Bank ("FHLB") stock, at cost
2,047

 
2,047

Property, premises, and equipment, at cost, less accumulated depreciation of $12,390 and $12,243
8,515

 
8,664

Deferred tax asset, net
3,187

 
3,585

Prepaid expenses and other assets
1,350

 
1,633

Total assets
$
478,880

 
$
469,654

LIABILITIES AND STOCKHOLDERS’ EQUITY 
 

 
 

LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
59,725

 
$
55,381

Interest-bearing
305,932

 
303,640

Total deposits
365,657

 
359,021

 
 
 
 
FHLB advances
37,000

 
37,000

Advance payments by borrowers for taxes and insurance
1,975

 
1,077

Supplemental Executive Retirement Plan liability
1,746

 
1,738

Accounts payable and other liabilities
3,826

 
3,374

Total liabilities
410,204

 
402,210

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.01 par value per share authorized 5,000,000 shares; no shares issued or outstanding

 

Common stock, $0.01 par value per share, authorized 45,000,000 shares; 2,484,030 issued and outstanding at September 30, 2018 and 2,484,030 issued and outstanding at June 30, 2018, respectively
25

 
25

Additional paid-in capital
22,343

 
22,298

Retained earnings
48,063

 
46,776

Unearned Employee Stock Ownership Plan ("ESOP") shares
(523
)
 
(540
)
Accumulated other comprehensive loss, net of tax
(1,232
)
 
(1,115
)
Total stockholders’ equity
68,676

 
67,444

Total liabilities and stockholders’ equity
$
478,880

 
$
469,654

 
See accompanying notes to condensed consolidated financial statements (unaudited).

1



 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)
Three Months Ended September 30,
 
 
 
2018
 
2017
 
Interest income:
 
 
 
 
Loans receivable, including fees
$
5,528

 
$
5,133

 
Securities
173

 
34

 
Mortgage-backed securities
115

 
130

 
Total interest income
5,816

 
5,297

 
Interest expense:
 

 
 

 
Deposits
914

 
842

 
FHLB advances
179

 
109

 
Total interest expense
1,093

 
951

 
Net interest income before provision for loan losses
4,723

 
4,346

 
Provision for loan losses
50

 
75

 
Net interest income after provision for loan losses
4,673

 
4,271

 
Noninterest income:
 

 
 

 
Deposit service fees
261

 
313

 
Other deposit fees
194

 
199

 
  Other loan fees
226

 
228

 
(Loss) gain on sale of loans
(2
)
 
110

 
Bank owned life insurance investment
129

 
129

 
Other income
341

 
193

 
Total noninterest income
1,149

 
1,172

 
Noninterest expense:
 

 
 

 
Compensation and benefits
1,962

 
2,084

 
General and administrative expenses
580

 
574

 
Merger expenses
266

 
34

 
Real estate impairment
50

 

 
Real estate owned holding costs, net
20

 
30

 
Federal Deposit Insurance Corporation ("FDIC") insurance premiums
47

 
36

 
Information technology
498

 
537

 
Occupancy and equipment
398

 
433

 
Deposit services
96

 
104

 
Marketing
59

 
91

 
Loss on sale of property, premises and equipment

 
5

 
Total noninterest expense
3,976

 
3,928

 
Income before provision for income taxes
1,846

 
1,515

 
Provision for income taxes
559

 
471

 
Net income
$
1,287

 
$
1,044

 
Basic earnings per share
$
0.52

 
$
0.43

 
Diluted earnings per share
$
0.52

 
$
0.43

 
Weighted average number of basic shares outstanding
2,484,011

 
2,421,049

 
Weighted average number of diluted shares outstanding
2,489,475

 
2,432,960

See accompanying notes to condensed consolidated financial statements (unaudited).

2



 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited)
Three Months Ended September 30,
 
 
 
2018
 
2017
 
NET INCOME
$
1,287

 
$
1,044

 
OTHER COMPREHENSIVE (LOSS) INCOME, net of income tax
 

 
 
 
Unrealized holding (losses) gains on available-for-sale securities during the period, net of income tax (benefit) expense of $(28) and $19, respectively
(117
)
 
36

 
Other comprehensive (loss) income, net of income tax
(117
)
 
36

 
COMPREHENSIVE INCOME
$
1,170

 
$
1,080


See accompanying notes to condensed consolidated financial statements (unaudited).


3


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data) (Unaudited)
Three Months Ended September 30,
 
 
 
2018
 
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
$
1,287

 
$
1,044

 
Adjustments to reconcile net income to net cash from operating activities:
 

 
 

 
Depreciation and amortization
149

 
158

 
Net amortization of premiums on securities
52

 
70

 
Provision for loan losses
50

 
75

 
ESOP expense
49

 
43

 
Real estate owned impairment
50

 

 
Deferred federal income taxes
368

 
326

 
Stock compensation expense
13

 
47

 
Increase in cash surrender value of life insurance investment
(129
)
 
(129
)
 
Loss (gain) on sale of loans
2

 
(110
)
 
Originations of loans held for sale
(1,001
)
 
(1,994
)
 
Proceeds from sale of loans held for sale
98

 
3,655

 
Loss on sale of property, premises, and equipment

 
5

 
Change in operating assets and liabilities:
 

 
 

 
Accrued interest receivable
(1
)
 
(12
)
 
Prepaid expenses and other assets
283

 
257

 
Supplemental Executive Retirement Plan ("SERP")
8

 
8

 
Accounts payable and other liabilities
452

 
832

 
Net cash provided by operating activities
1,730

 
4,275

 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

 
Principal repayments on mortgage-backed available-for-sale securities
783

 
937

 
Principal repayments on mortgage-backed held-to-maturity securities
283

 
374

 
Loan originations, net of undisbursed loan proceeds and principal repayments
22,650

 
(7,179
)
 
Capital improvements on real estate owned
(2
)
 

 
Proceeds from sale of property, premises, and equipment, net

 
160

 
Redemption of FHLB stock

 
312

 
Net cash provided by (used in) investing activities
23,714

 
(5,396
)
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
Net change in deposits
6,636

 
3,189

 
Net change in advance payments by borrowers for taxes and insurance
898

 
708

 
Proceeds from FHLB advances

 
15,200

 
Repayment of FHLB advances

 
(23,000
)
 
Net share settlement of stock awards

 
(245
)
 
Net cash provided by (used in) financing activities
$
7,534

 
$
(4,148
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands, except share data) (Unaudited)
Three Months Ended September 30,
 
 
 
2018
 
2017
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
32,978

 
$
(5,269
)
 
Beginning of period
17,568

 
14,194

 
End of period
$
50,546

 
$
8,925

 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 

 
 

 
Cash paid during the period for:
 
 
 
 
Interest
$
1,093

 
$
960

 
Income taxes
$

 
$
145

 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
 
 
 
 
Noncash investing activities:
 

 
 

 
Net loans transferred to real estate owned
$
53

 
$
1,791

 
Unrealized holding (loss) gain on available-for-sale securities, net of tax
$
(117
)
 
$
36


See accompanying notes to condensed consolidated financial statements (unaudited).

5


ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Nature of Business

Anchor Bancorp (the “Company”), a Washington corporation, was formed in connection with the conversion of Anchor Mutual Savings Bank (the “Bank”) from the mutual to the stock form of organization. On January 25, 2011, the Bank completed its conversion from mutual to stock form, changed its name to “Anchor Bank” and became the wholly-owned subsidiary of the Company.

Anchor Bank is a community-based savings bank primarily serving Western Washington through its nine full-service bank offices within Grays Harbor, Thurston, Lewis, and Pierce counties, and one loan production office located in King County, Washington.  Anchor Bank’s business consists of attracting deposits from the public and utilizing those deposits to originate loans.
 
Note 2 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2018 (“2018 Form 10-K”). The results of operations for the three months ended September 30, 2018 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2019. Certain prior year amounts have been reclassified to conform to current fiscal year presentation. The reclassifications had no impact on previously reported consolidated net income or equity. The Company has evaluated events and transactions subsequent to September 30, 2018 for potential recognition or disclosure.

Note 3 - Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The amendments have the same effective date as ASU 2016-02. The effect of the adoption will depend on leases at time of adoption. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases the adoption of these ASUs is not expected to have a material impact on the Company's consolidated financial statements.

6

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will not be known.

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"). ASU 2018-02 eliminates the stranded tax effects within AOCI resulting from the application of current U.S. GAAP in response to the change in the U.S. corporate income tax rate from 35 percent to 21 percent as part of the Tax Cuts and Jobs Act of 2017 enacted in December 2017 (the "Tax Act"). Stranded tax effects unrelated to the Tax Act are released from AOCI using the security-by-security approach. The Company elected to early adopt ASU 2018-02 effective during the year ended June 30, 2018 and applied the provisions retrospectively within our Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity. This adoption resulted in a one-time reclassification of the effect of remeasuring deferred tax liabilities related to items, primarily unrealized gains and losses on investments, within AOCI to retained earnings resulting from the change in the U.S. corporate income tax rate. This reclassification resulted in a decrease to AOCI and an increase to retained earnings in the amount of $39,496 for the year ended June 30, 2018, with no net impact to total stockholders' equity.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740). This ASU was issued to provide guidance on the income tax accounting implications of the Tax Act and allows for entities to report provisional amounts for specific income tax effects of the Act for which the accounting under ASC Topic 740 was not yet complete but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under ASC Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the Consolidated Financial Statements in the Form 10-Q for the quarter ended December 31, 2017. As of September 30, 2018 the Company did not incur any adjustments to the provisional recognition.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU amends the accounting for shared-based payments awards to nonemployees to align with the accounting for employee awards. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. Amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2018-07 is not expected to have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This ASU modifies the disclosure requirements on fair value measurements. The following disclosure requirements were removed from FASB Accounting Standards Codification (“ASC”) Topic 820 - Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this ASU are effective for

7

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's consolidated financial statements.

Application of New Accounting Guidance
On July 1, 2018, the Company adopted FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively “ASC 606”)which created Topic 606 and supersedes Topic 605, Revenue Recognition. In August 2015, FASB issued ASU No. 2015‑14, Revenue from Contracts with Customers (Topic 606), which postponed the effective date of 2014‑09. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under past guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. For financial reporting purposes, the Company utilized the modified retrospective approach, meaning the ASU is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. As a bank holding company, key revenue sources, such as interest income on loans, investment securities and deposits, as well as other sources of income including loan fees, security sales, and derivatives have been identified as out of the scope of this new guidance. Management conducted an assessment of the revenue streams that were affected by the new guidance and identified those considered material and in scope to ensure compliance with the new guidance concluding those related to credit and debit card fees, and service charges and fees on deposit accounts.  No additional changes to processes or procedures were identified for the recognition of revenues in scope. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. The additional disclosures required by this ASU have been included in “Note 13 - Revenue from Contracts with Customers”.
On July 1, 2018, the Company adopted FASB issued ASU No. 2016‑01, Financial Instruments - Overall (Subtopic 825‑10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance improves the recognition and measurement of financial instruments. This ASU requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The adoption of ASU No. 2016-01 did not have a material impact on the Company’s consolidated financial statements. The disclosures to the Company’s consolidated financial statements have been updated appropriately using the exit price notion in “Note 9 - Fair Value of Financial Instruments”.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. Management adopted the new guidance on July 1, 2018. The adoption of ASU No. 2016-15 did not have a material impact on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The ASU amends the required statement of cash flow disclosures to include the change in amounts generally described as restricted cash. Management adopted the new guidance on July 1, 2018. The adoption of ASU No. 2016-18 did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity on the guidance related to stock compensation when there has been changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting under ASC 718. The ASU provides the three following criteria must be met in order to not account for the effect of the modification of terms or conditions: the fair value, the vesting conditions and the classification as an equity or liability instrument of the modified award is the same as the original award immediately before the original award is modified. Management adopted the new guidance on July 1, 2018. The adoption of ASU No. 2017-09 did not have a material impact on the Company's consolidated financial statements.



8

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Management adopted the new guidance on July 1, 2018. The adoption of ASU No. 2017-12 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU address how a customer should account for the costs of implementing a cloud computing service arrangement (also referred to as a “hosting arrangement”).  Entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract in the same way as accounting for implementation costs incurred to develop or obtain software for internal use using the guidance in ASC 350-40. The amendments also addresses when costs should be capitalized rather than expensed, the term to use when amortizing capitalized costs, and how to evaluate the unamortized portion of these capitalized implementation costs for impairment and includes guidance on how to present implementation costs in the financial statements and creates additional disclosure requirements. Amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. The adoption of ASU No. 2018-15 is not expected to have a material impact on the Company's consolidated financial statements.


9

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 4 - Earnings Per Share ("EPS")

Basic earnings per common share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period, without considering any dilutive items. Unvested share-based awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. Therefore, under the two-class method, the difference in EPS is not significant since the Company did not pay dividends. The following table details the calculation of basic and diluted earnings per share:

 
For the Three Months Ended September 30,
 
2018
 
2017
 
(Dollars in thousands, except share data)
Net income
$
1,287

 
$
1,044

Earnings allocated to common shareholders
$
1,287

 
$
1,044

 
 
 
 
Basic weighted-average common shares outstanding
2,484,011

 
2,421,049

Potentially dilutive incremental shares
5,464

 
11,911

Diluted weighted-average common shares outstanding
2,489,475

 
2,432,960

 
 
 
 
Basic earnings per share
$
0.52

 
$
0.43

Diluted earnings per share
$
0.52

 
$
0.43


Shares owned by the Company's ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted EPS. As of September 30, 2018 and September 30, 2017 there were 46,766 and 53,649 shares, respectively, which had not been allocated under the Company's ESOP.

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For both the three months ended September 30, 2018 and 2017, there were no anti-dilutive shares included in the computation of diluted earnings per share.


10

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 5 - Investments

The amortized cost and estimated fair market values of investment securities as of September 30, 2018 and June 30, 2018, were as follows:

September 30, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
152

 
$

 
$

 
$
152

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC (1)
10,037

 
10

 
(418
)
 
9,629

FNMA (2)
7,011

 

 
(340
)
 
6,671

GNMA (3)
386

 

 
(21
)
 
365

 
$
17,586

 
$
10

 
$
(779
)
 
$
16,817

Securities held-to-maturity
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
$
1,684

 
$
28

 
$
(88
)
 
$
1,624

FNMA
943

 
35

 
(30
)
 
948

GNMA
660

 

 
(44
)
 
616

 
$
3,287

 
$
63

 
$
(162
)
 
$
3,188

(1) Federal Home Loan Mortgage Corporation ("Freddie Mac")
(2) Federal National Mortgage Association ("Fannie Mae")
(3) Government National Mortgage Association ("Ginnie Mae")     

June 30, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
155

 
$

 
$

 
$
155

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC 
10,337

 
11

 
(350
)
 
9,998

FNMA
7,494

 

 
(323
)
 
7,171

GNMA 
421

 

 
(20
)
 
401

 
$
18,407

 
$
11

 
$
(693
)
 
$
17,725

Securities held-to-maturity
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
$
1,805

 
30

 
(84
)
 
$
1,751

FNMA
982

 
40

 
(26
)
 
996

GNMA
797

 

 
(44
)
 
753

 
$
3,584

 
$
70

 
$
(154
)
 
$
3,500


There were 56 and 55 securities in an unrealized loss position at September 30, 2018 and June 30, 2018, respectively. The unrealized losses on investments in mortgage-backed securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities' purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  We do not intend to sell the temporarily impaired securities and it is not likely that we will be required to sell the securities prior to their maturity. We do expect to recover the entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of the dates indicated, were as follows:

11

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2018
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
5,071

 
$
(154
)
 
$
4,320

 
$
(265
)
 
$
9,391

 
$
(419
)
FNMA

 

 
6,671

 
(340
)
 
6,671

 
(340
)
GNMA

 

 
365

 
(20
)
 
365

 
(20
)
 
$
5,071

 
$
(154
)
 
$
11,356

 
$
(625
)
 
$
16,427

 
$
(779
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2018
(In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
1,141

 
$
(88
)
 
$
1,141

 
$
(88
)
FNMA

 

 
410

 
(30
)
 
410

 
(30
)
GNMA

 

 
616

 
(44
)
 
616

 
(44
)
 
$

 
$

 
$
2,167

 
$
(162
)
 
$
2,167

 
$
(162
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2018
 (In thousands)
Securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
5,696

 
$
(143
)
 
$
3,650

 
$
(207
)
 
$
9,346

 
$
(350
)
FNMA
781

 
(27
)
 
6,389

 
(296
)
 
7,170

 
(323
)
GNMA

 

 
402

 
(20
)
 
402

 
(20
)
 
$
6,477

 
$
(170
)
 
$
10,441

 
$
(523
)
 
$
16,918

 
$
(693
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2018
 (In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
1,206

 
$
(84
)
 
$
1,206

 
$
(84
)
FNMA

 

 
434

 
(26
)
 
434

 
(26
)
GNMA

 

 
753

 
(44
)
 
753

 
(44
)
 
$

 
$

 
$
2,393

 
$
(154
)
 
$
2,393

 
$
(154
)



12

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Contractual maturities of securities at September 30, 2018 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.
September 30, 2018
Amortized
Cost
 
Fair Value
 
(In thousands)
Securities available-for-sale
 
Municipal bonds:
 
 
 
Due after five to ten years
$
152

 
$
152

Mortgage-backed securities:
 
 
 
FHLMC
10,037

 
9,629

FNMA
7,011

 
6,671

GNMA
386

 
365

 
$
17,586

 
$
16,817

Securities held-to-maturity
 
Mortgage-backed securities:
 
 
 
FHLMC
$
1,684

 
$
1,624

FNMA
943

 
948

GNMA
660

 
616

 
$
3,287

 
$
3,188


There were no sales of securities available-for-sale for the three months ended September 30, 2018 and 2017.

Pledged securities at the dates indicated are summarized as follows:

 
September 30, 2018
 
June 30, 2018
Pledged to secure:
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(In thousands)
Public deposits
$
3,825

 
$
3,671

 
$
4,035

 
$
3,903

FHLB borrowings
727

 
730

 
766

 
770

Federal Reserve borrowing line
1,145

 
1,070

 
1,323

 
1,249



13

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 6 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:
 
 
September 30, 2018
 
June 30,
2018
 
(In thousands)
Real estate:
 
 
 
One-to-four family
$
63,387

 
$
62,110

Multi-family
56,292

 
57,639

Commercial
156,452

 
150,050

Construction
64,106

 
85,866

Land
5,133

 
5,515

Total real estate
345,370

 
361,180

Consumer:
 

 
 

Home equity
12,522

 
12,291

Credit cards
2,198

 
2,284

Automobile
299

 
372

Other consumer
1,139

 
960

Total consumer
16,158

 
15,907

 
 
 
 
Business:
 
 
 
Commercial business
13,098

 
20,329

Total loans
374,626

 
397,416

Less:
 

 
 

Deferred loan fees and loan premiums, net
915

 
1,002

Allowance for loan losses
4,420

 
4,370

Loans receivable, net
$
369,291

 
$
392,044

 
Allowance for Loan Losses. The allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. The assessment includes analysis of several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 9/30/18
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
339

 
$
585

 
$
1,478

 
$
1,280

 
$
83

 
$
353

 
$
252

 
$

 
$
4,370

Provision (benefit) for loan losses
41

 
73

 
239

 
(355
)
 
(21
)
 
40

 
33

 

 
50

Charge-offs

 

 

 

 

 
(20
)
 

 

 
(20
)
Recoveries
14

 

 

 
1

 

 
5

 

 

 
20

Ending balance
$
394

 
$
658

 
$
1,717

 
$
926

 
$
62

 
$
378

 
$
285

 
$

 
$
4,420

(1) 
Consumer loans include home equity, credit cards, automobile, and other consumer loans. The only consumer loans with impairment are home equity loans.

14

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2017:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 9/30/17
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
495

 
$
580

 
$
1,566

 
$
651

 
$
120

 
$
378

 
$
316

 
$

 
$
4,106

Provision (benefit) for loan losses
(207
)
 
10

 
168

 
169

 
(1
)
 
(40
)
 
(24
)
 

 
75

Charge-offs

 

 
(200
)
 

 

 
(1
)
 

 

 
(201
)
Recoveries
14

 

 

 
1

 

 
17

 
5

 

 
37

Ending balance
$
302

 
$
590

 
$
1,534

 
$
821

 
$
119

 
$
354

 
$
297

 
$

 
$
4,017

(1) 
Consumer loans include home equity, credit cards, automobile, and other consumer loans. The only consumer loans with impairment are home equity loans.


A loan is considered impaired when the Company has determined that it may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, management takes into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan by loan basis for all loans in the portfolio except for the smaller groups of homogeneous consumer loans in the portfolio.


15

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2018:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
703

 
$
896

 
$

Home equity
316

 
330

 

Commercial business
63

 
125

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
2,295

 
$
2,305

 
$
95

Land
246

 
246

 
6

Home equity
252

 
252

 
65

Other consumer
12

 
12

 
12

Commercial business
141

 
162

 
17

Total
 

 
 

 
 

One-to-four family
$
2,998

 
$
3,201

 
$
95

Land
246

 
246

 
6

Home equity
568

 
582

 
65

Other consumer
12

 
12

 
12

Commercial business
204

 
287

 
17

Total
$
4,028

 
$
4,328

 
$
195


The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2018:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
608

 
$
794

 
$

Home equity
330

 
345

 

Commercial business
285

 
366

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
2,341

 
$
2,351

 
$
85

Land
300

 
300

 
13

Home equity
150

 
150

 
80

Other consumer
14

 
14

 
13

Total
 

 
 

 
 

One-to-four family
$
2,949

 
$
3,145

 
$
85

Land
300

 
300

 
13

Home equity
480

 
495

 
80

Other consumer
14

 
14

 
13

Commercial business
285

 
366

 

Total
$
4,028

 
$
4,320

 
$
191



16

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three months ended September 30, 2018 and 2017:

 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
 
 
 
 
One-to-four family
$
656

 
$
1

 
$
1,716

 
$
3

Commercial real estate

 

 
996

 

Home equity
323

 
1

 
281

 
1

Commercial business
174

 
1

 
480

 
1

With an allowance recorded
 

 
 

 
 
 
 
One-to-four family
$
2,318

 
$
9

 
$
3,084

 
$
11

Land
273

 
7

 
310

 
7

Home equity
201

 
1

 
261

 
1

Other consumer
13

 

 

 

Commercial business
71

 

 
12

 

Total
 

 
 

 
 
 
 
One-to-four family
$
2,974

 
$
10

 
$
4,800

 
$
14

Commercial real estate

 

 
996

 

Land
273

 
7

 
310

 
7

Home equity
524

 
2

 
542

 
2

Other consumer
13

 

 

 

Commercial business
245

 
1

 
492

 

Total
$
4,029

 
$
20

 
$
7,140

 
$
23









17

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2018:

 
One-to-four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer(1)
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
394

 
$
658

 
$
1,717

 
$
926

 
$
62

 
$
378

 
$
285

 
$

 
$
4,420

Ending balance: individually evaluated for impairment
95

 

 

 

 
6

 
77

 
17

 

 
195

Ending balance: collectively evaluated for impairment
$
299

 
$
658

 
$
1,717

 
$
926

 
$
56

 
$
301

 
$
268

 
$

 
$
4,225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
63,387

 
$
56,292

 
$
156,452

 
$
64,106

 
$
5,133

 
$
16,158

 
$
13,098

 
$

 
$
374,626

Ending balance: individually evaluated for impairment
2,998

 

 

 

 
246

 
580

 
204

 

 
4,028

Ending balance: collectively evaluated for impairment
$
60,389

 
$
56,292

 
$
156,452

 
$
64,106

 
$
4,887

 
$
15,578

 
$
12,894

 
$

 
$
370,598

(1) 
 Consumer loans include home equity, credit cards, auto and other consumer loans.

18

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2018:
 
One-to-four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer(1)
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
339

 
$
585

 
$
1,478

 
$
1,280

 
$
83

 
$
353

 
$
252

 
$

 
$
4,370

Ending balance: individually evaluated for impairment
85

 

 

 

 
13

 
93

 

 

 
191

Ending balance: collectively evaluated for impairment
$
254

 
$
585

 
$
1,478

 
$
1,280

 
$
70

 
$
260

 
$
252

 
$

 
$
4,179

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
62,110

 
$
57,639

 
$
150,050

 
$
85,866

 
$
5,515

 
$
15,907

 
$
20,329

 
$

 
$
397,416

Ending balance: individually evaluated for impairment
2,949

 

 

 

 
300

 
494

 
285

 

 
4,028

Ending balance: collectively evaluated for impairment
$
59,161

 
$
57,639

 
$
150,050

 
$
85,866

 
$
5,215

 
$
15,413

 
$
20,044

 
$

 
$
393,388

(1) 
 Consumer loans include home equity, credit cards, auto, and other consumer loans.

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual when, in management's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

The following table presents the recorded investment in nonaccrual loans by type of loans as of the dates indicated:

 
September 30, 2018
 
June 30, 2018
 
(In thousands)
One-to-four family
$
450

 
$
507

Home equity
297

 
207

Commercial business
141

 
222

Total
$
888

 
$
936


There were no loans past due 90 days or more and still accruing interest at September 30, 2018 and June 30, 2018.
 

19

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents past due loans, net of partial loan charge-offs, by class of loan, as of September 30, 2018:

 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due (1)
 
Total Past
Due
 
Current
 
Total Loans
 
(In thousands)
One-to-four family
$
330

 
$
179

 
$
450

 
$
959

 
$
62,428

 
$
63,387

Multi-family

 

 

 

 
56,292

 
56,292

Commercial real estate

 

 

 

 
156,452

 
156,452

Construction

 

 

 

 
64,106

 
64,106

Land

 

 

 

 
5,133

 
5,133

Home equity
57

 

 
297

 
354

 
12,168

 
12,522

Credit cards
6

 
4

 

 
10

 
2,188

 
2,198

Automobile

 

 

 

 
299

 
299

Other consumer
3

 
3

 

 
6

 
1,133

 
1,139

Commercial business

 

 
141

 
141

 
12,957

 
13,098

Total
$
396

 
$
186

 
$
888

 
$
1,470

 
$
373,156

 
$
374,626

(1) Includes loans on nonaccrual status.


The following table presents past due loans, net of partial loan charge-offs, by class of loan as of June 30, 2018:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due (1)
 
Total Past
Due
 
Current
 
Total
Loans
 
(In thousands)
One-to-four family
$
683

 
$
122

 
$
507

 
$
1,312

 
$
60,798

 
$
62,110

Multi-family

 

 

 

 
57,639

 
57,639

Commercial real estate

 

 

 

 
150,050

 
150,050

Construction

 

 

 

 
85,866

 
85,866

Land

 

 

 

 
5,515

 
5,515

Home equity
220

 

 
207

 
427

 
11,864

 
12,291

Credit cards
6

 
8

 

 
14

 
2,270

 
2,284

Automobile

 

 

 

 
372

 
372

Other consumer
4

 

 

 
4

 
956

 
960

Commercial business
9

 

 
222

 
231

 
20,098

 
20,329

Total
$
922

 
$
130

 
$
936

 
$
1,988

 
$
395,428

 
$
397,416

(1) Includes loans on nonaccrual status.

Credit Quality Indicators. We utilize a ten-point risk rating system and assign a risk rating for all credit exposures. The risk rating system is designed to define the basic characteristics and identify risk elements of each credit extension.

Credits risk rated 1 through 7 are considered to be “pass” credits. Pass credits can be assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on our watch and special mention lists, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower's financial capacity and threaten their ability to fulfill debt obligations in the future. A seasoned loan with a Debt Service Coverage Ratio ("DSCR") of greater than 1.00 is the minimum acceptable level for a "Pass Credit". Particular attention is paid to the coverage trend analysis as any loan with a declining DSCR trend may warrant a higher risk grade even if the current coverage is at or above the 1.00 threshold.


20

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Credits classified as Watch are risk rated 6 and possess weaknesses that deserve management's close attention. These assets do not expose the Bank to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. We use this rating when a material documentation deficiency exists but correction is anticipated within an acceptable time frame.

A loan classified as Watch may have the following characteristics:

Acceptable asset quality, but requiring increased monitoring. Strained liquidity and less than anticipated performance. The loan may be fully leveraged.
Apparent management weakness, perhaps demonstrated by an irregular flow of adequate and/or timely performance information required to support the credit.
The borrower has a plausible plan to correct problem(s) in the near future that is devoid of material uncertainties.
Lacks reserve capacity, so the risk rating will improve or decline in relatively short time (results of corrective actions should be apparent within six months or less).

Credits classified as Special Mention are risk rated 7. These credits have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

A loan classified as Special Mention may have the following characteristics:

Performance is poor or significantly less than expected. A debt service deficiency either exists or cannot be ruled out.
Generally an undesirable business credit. Assets in this category are protected, but are potentially weak. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard. Special Mention assets have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.
Assets which might be detailed in this category include credits that the lending officer may be unable to supervise properly because of lack of expertise, an inadequate loan agreement, the condition of and control over collateral, failure to obtain proper documentation, or any other deviations from prudent lending practices.
An adverse trend in the borrower's operations or an imbalanced position in the balance sheet which does not jeopardize liquidation may best be handled by this classification.
A Special Mention classification should not be used as a compromise between a pass and substandard rating. Assets in which actual, not potential, weaknesses are evident and significant, and should be considered for more serious criticism.

A loan classified as Substandard is risk rated 8. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. An asset is considered Substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

A loan classified as Substandard may have the following characteristics:

Unacceptable business credit. The asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt.
Though no loss is envisioned, the outlook is sufficiently uncertain to preclude ruling out the possibility. Some liquidation of assets will likely be necessary as a corrective measure.
Assets in this category may demonstrate performance problems such as debt servicing deficiencies with no immediate relief, including having a DSCR of less than 1.00. Borrowers have an inability to adjust to prolonged and unfavorable industry or economic trends. Management's character and/or effectiveness have become suspect.
A loan classified as Doubtful is risk rated 9 and has all the inherent weaknesses as those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable is improbable.
A loan classified as Doubtful is risk rated 9 and has the following characteristics:
The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

21

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
A loan risk rated 10 is a loan for which a total loss is expected.
A loan classified as a Loss has the following characteristics:
An uncollectible asset or one of such little value that it does not warrant classification as an active, earning asset. Such an asset may, however, have recovery or salvageable value, but not to the point of deferring full write off, even though some recovery may occur in the future.
The Bank will charge off such assets as a loss during the accounting period in which they were identified.
Loan to be eliminated from the active loan reporting system via charge off.

The following table presents the internally assigned grade as of September 30, 2018, by class of loans:

 
One-to- four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Home equity
 
Credit cards
 
Automobile
 
Other
consumer
 
Commercial business
 
Total
 
(In thousands)
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
62,334

 
$
55,047

 
$
155,652

 
$
62,486

 
$
5,133

 
$
11,838

 
$
2,188

 
$
299

 
$
1,126

 
$
12,898

 
$
369,001

Watch
155

 
1,245

 
800

 
1,620

 

 
198

 
10

 

 
3

 
59

 
4,090

Special Mention
448

 

 

 

 

 
189

 

 

 
10

 

 
647

Substandard
450

 

 

 

 

 
297

 

 

 

 
141

 
888

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
63,387

 
$
56,292

 
$
156,452

 
$
64,106

 
$
5,133

 
$
12,522

 
$
2,198

 
$
299

 
$
1,139

 
$
13,098

 
$
374,626



The following table presents the internally assigned grade as of June 30, 2018, by class of loans:

 
One-to- four family
 
Multi-family
 
Commercial
real estate
 
Construction
 
Land
 
Home equity
 
Credit cards
 
Automobile
 
Other
consumer
 
Commercial business
 
Total
 
(In thousands)
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
60,525

 
$
57,315

 
$
148,584

 
$
85,866

 
$
5,515

 
$
11,637

 
$
2,270

 
$
360

 
$
951

 
$
19,829

 
$
392,852

Watch
689

 
324

 
1,466

 

 

 
297

 
14

 
12

 
5

 
278

 
3,085

Special Mention
389

 

 

 

 

 
150

 

 

 
4

 

 
543

Substandard
507

 

 

 

 

 
207

 

 

 

 
222

 
936

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
62,110

 
$
57,639

 
$
150,050

 
$
85,866

 
$
5,515

 
$
12,291

 
$
2,284

 
$
372

 
$
960

 
$
20,329

 
$
397,416


Troubled Debt Restructures. A troubled debt restructure ("TDR") is a loan where the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider so that the borrower can continue to make payments while minimizing the Company's potential loss. The modifications have included items such as lowering the interest rate on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank's best interest. At September 30, 2018, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.

22

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents TDRs by accrual versus nonaccrual status and by loan class as of September 30, 2018:

 
September 30, 2018
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
2,431

 
$
103

 
$
2,534

Land
246

 

 
246

Home equity
121

 

 
121

Other consumer
12

 

 
12

Commercial business
63

 

 
63

Total
$
2,873

 
$
103

 
$
2,976



The following table presents TDRs by accrual versus nonaccrual status and by loan class as of June 30, 2018:
 
 
June 30, 2018
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
2,443

 
$
108

 
$
2,551

Land
299

 

 
299

Home equity
124

 

 
124

Other consumer
14

 

 
14

Commercial business
63

 

 
63

Total
$
2,943

 
$
108

 
$
3,051



There were no new TDR loans, or renewals or modifications of existing TDR loans during the three months ended September 30, 2018 and 2017.

For the three months ended September 30, 2018 and 2017, there were no TDRs for which there was a payment default within 12 months of their restructure.


23

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 7 - Real Estate Owned, net
 
The following table is a summary of REO activity for the three months ended September 30, 2018 and 2017:

 
Three Months Ended September 30,
 
 
2018
 
2017
 
(In thousands)
Balance at the beginning of the period
$
737

 
$
867

Net loans transferred to real estate owned
53

 
1,791

Capitalized improvements
2

 

Impairments
(50
)
 

Balance at the end of the period
$
742

 
$
2,658


At September 30, 2018, there were two loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

Note 8 - Employee Benefit Plans

On January 25, 2011, the Company established an ESOP for the benefit of substantially all employees. The ESOP borrowed $1.0 million from the Company and used those funds to acquire 102,000 shares of the Company's common stock at the time of the initial public offering at a price of $10.00 per share.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company's discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on June 30th, the Company's fiscal year end.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the daily average market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued throughout the year.

Compensation expense related to the ESOP for the three months ended September 30, 2018 and 2017 was $49,000 and $43,000, respectively.

Shares held by the ESOP as of the dates indicated are as follows:

 
September 30, 2018
 
June 30, 2018
 
(Dollars in thousands)
Allocated shares
55,234

 
53,514

Unallocated shares
46,766

 
48,486

Total ESOP shares
102,000

 
102,000

Fair value of unallocated shares
$
1,323

 
$
1,268



24

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 9 - Fair Value Measurements

On July 1, 2018, the Company adopted ASU 2016-01,  Financial Instruments - Overall (Subtopic 825‑10), Recognition and Measurement of Financial Assets and Financial Liabilities, which requires us to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes rather than the previous method of entry price notion. Under the entry price notion, the fair value estimate of loans receivable was based on discounted cash flow. At September 30, 2018, the exit price notion used to estimate the fair value of loans receivable was based on similar techniques, with the addition of current origination spreads, liquidity premiums, or credit adjustments. The fair value of nonperforming loans is based on the underlying value of the collateral for periods prior to and after adoption of ASU 2016-01.

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly. The following definitions describe the levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company's own assumptions about the assumptions market participants would use in pricing an asset or liability based on the best information available in the circumstances.

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended September 30, 2018. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
152

 
$

 
$
152

Mortgage-backed securities:
 
 
 
 
 
 


FHLMC

 
9,629

 

 
9,629

FNMA

 
6,671

 

 
6,671

GNMA

 
365

 

 
365


 
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
155

 
$

 
$
155

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC

 
9,998

 

 
9,998

FNMA

 
7,171

 

 
7,171

GNMA

 
401

 

 
401


Assets and liabilities measured at fair value on a nonrecurring basis - Assets and liabilities are considered to be reflected at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, a nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.



25

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents the balances of assets measured at fair value on a nonrecurring basis at September 30, 2018:
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:


 


 


 


Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
2,331

 
$
2,331

Land

 

 
246

 
246

Home equity

 

 
252

 
252

Other consumer

 

 
12

 
12

Commercial business

 

 
141

 
141

Total impaired loans 

 

 
2,982

 
2,982

 
 
 
 
 
 
 
 
Real estate owned:


 


 


 


One-to-four family
$

 
$

 
$
599

 
$
599

Total real estate owned

 

 
599

 
599

 
 
 
 
 
 
 
 
Total
$

 
$

 
$
3,581

 
$
3,581


The following table presents the balances of assets measured at fair value on a nonrecurring basis at June 30, 2018:

 
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
2,443

 
$
2,443

Land

 

 
300

 
300

Home equity

 

 
221

 
221

Other consumer

 

 
14

 
14

Total impaired loans

 

 
2,978

 
2,978

 
 
 
 
 
 
 
 
Total
$

 
$

 
$
2,978

 
$
2,978









26

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The fair values of impaired loans and real estate owned properties are generally based on third party appraisal of the properties, resulting in Level 3 classification.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2018 and June 30, 2018:
 
 
September 30, 2018
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Average Discount)
 
(Dollars in thousands)
Impaired loans
$
2,982

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
   0% - 10% (6%)
Real estate owned
$
599

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
   0% - 100% (8%)
    
 
June 30, 2018
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Average Discount)
 
(Dollars in thousands)
Impaired loans
$
2,978

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 10% (7%)

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of September 30, 2018 and June 30, 2018
 
September 30, 2018
 
Carrying Amount
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(In thousands)
Financial Instruments-Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
50,546

 
$
50,546

 
$
50,546

 
$

 
$

Securities available-for-sale
16,817

 
16,817

 

 
16,817

 

Securities held-to-maturity
3,287

 
3,188

 

 
3,188

 

FHLB stock
2,047

 
2,047

 

 
2,047

 

Loans held for sale
999

 
999

 
999

 

 

Loans receivable
373,711

 
363,243

 

 

 
363,243

Accrued interest receivable
1,424

 
1,424

 

 
1,424

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
204,439

 
$
204,439

 
$
204,439

 
$

 
$

Certificates of deposit
161,218

 
160,509

 

 
160,509

 

FHLB advances
37,000

 
36,667

 

 
36,667

 

Advance payments by borrowers for taxes and insurance
1,975

 
1,975

 
1,975

 

 


27

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
June 30, 2018
 
Carrying Amount
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(In thousands)
Financial Instruments-Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
17,568

 
$
17,568

 
$
17,568

 
$

 
$

Securities available-for-sale
17,725

 
17,725

 

 
17,725

 

Securities held-to-maturity
3,584

 
3,500

 

 
3,500

 

FHLB stock
2,047

 
2,047

 

 
2,047

 

Loans held for sale
98

 
98

 
98

 

 

Loans receivable
396,414

 
385,570

 

 

 
385,570

Accrued interest receivable
1,423

 
1,423

 

 
1,423

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
193,545

 
$
193,545

 
$
193,545

 
$

 
$

Certificates of deposit
165,476

 
164,886

 

 
164,886

 

FHLB advances
37,000

 
36,666

 

 
36,666

 

Advance payments by borrowers for taxes and insurance
1,077

 
1,077

 
1,077

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents, accrued interest receivable and advance payments by borrowers for taxes and insurance -The carrying amount is a reasonable estimate of fair value.
Securities - The estimated fair values of securities are based on quoted market prices of similar securities.
FHLB stock - FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the member institutions, and can only be purchased and redeemed at par.
Loans held for sale - The fair value of loans held-for-sale is based on quoted market prices from FHLMC. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.
Loans receivable - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral.
Demand deposits, savings, money market, and certificates of deposit - The fair value of the Bank's demand deposits, savings, and money market accounts is the amount payable on demand. The fair value of fixed-maturity certificates is estimated using a discounted cash flow analysis using current rates offered for deposits of similar remaining maturities.
FHLB advances - The fair value of the Bank's FHLB advances was calculated using the discounted cash flow method. The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.
Commitments to extend credit represent the principal categories of off-balance-sheet financial instruments - The fair values of these commitments are not material since they are for a short period of time and are subject to customary credit terms.

28

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 10 - Stock-Based Compensation

On October 21, 2015, the Company’s stockholders approved the Anchor Bancorp 2015 Equity Incentive Plan ("Plan"), which provides for awards of restricted stock, restricted stock units, and stock options to directors, advisory directors, directors emeriti, officers and employees. The cost of awards under the Plan generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the Plan is 193,800. Shares of common stock issued under the Plan may be authorized but unissued.

As of September 30, 2018, awards for restricted stock totaling 87,572 were outstanding and no stock options were granted. Awarded shares of restricted stock typically vest over various periods as long as the director, advisory director, directors emeriti, officer or employee remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

For the three months ended September 30, 2018 total compensation expense for the Plan was $13,000, and the related income tax benefit was $3,000.

The following tables provide a summary of changes in non-vested restricted stock awards for the three months ended September 30, 2018:

 
 
For the Three Months Ended September 30, 2018
 
 
 
 
 
 
Weighted-Average Grant Date Fair Value
 
 
Shares
 
Non-vested at July 1, 2018
 
7,456

 
$
25.75

Granted
 

 

Vested
 

 

Forfeited and canceled
 

 

Non-vested at September 30, 2018
 
7,456

 
25.75



As of September 30, 2018, there was $51,000 of total unrecognized compensation costs related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately two years.


29

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 11 - Federal Income Taxes

On December 22, 2017, the U.S. Government enacted the Tax Act. The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21% rate. The corporate income tax rate reduction was effective January 1, 2018. Because the Company has a fiscal year end of June 30, the reduced corporate income tax rate resulted in the application of a blended federal statutory income tax rate for its fiscal year 2018 of 28% and is now a flat 21% for fiscal 2019 and thereafter.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

As of September 30, 2018, the Condensed Consolidated Statements of Financial Condition included a net deferred tax asset of $3.2 million. The Company's primary deferred tax assets relate to the allowance for loan losses. The Company has prepared federal tax returns through June 30, 2018. At June 30, 2018 the net operating loss carryforward was $2.2 million which will begin to expire in 2031.

Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. Our policy is to evaluate our deferred tax assets on a quarterly basis and record a valuation allowance for our deferred tax asset if we do not have sufficient positive evidence indicating that it is more likely than not that some or all of the deferred tax asset will be realized. Each quarter, we consider positive evidence, which may include taxes paid in carryback years, reversing timing differences, available tax planning strategies, and projected taxable income and weigh it against negative evidence, which may include cumulative losses in the most recent three year period and uncertainty regarding short-term future earnings, among other items. At September 30, 2018, management determined that no valuation allowance on the deferred tax asset was required. This determination was based on sufficient positive evidence associated with our return to profitability, demonstrated through cumulative earnings over the recent three year period, strong quarterly income, and our projections for future taxable income.

Note 12 - Agreement and Plan of Merger

On July 17, 2018, the Company entered into an Agreement and Plan of Merger ("merger agreement") with FS Bancorp, Inc., a Washington corporation (“FS Bancorp”). The merger agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into FS Bancorp (the "merger") with FS Bancorp as the surviving corporation in the merger. Immediately after the effective time of the merger, FS Bancorp intends to merge Anchor Bank, a wholly-owned subsidiary of the Company, with and into 1st Security Bank of Washington, a wholly-owned subsidiary of FS Bancorp, with 1st Security Bank of Washington as the surviving institution in the bank merger.

Under terms of the merger agreement, each share of Anchor Bancorp common stock will receive fixed consideration consisting of 0.2921 shares of FS Bancorp common stock and $12.40 per share in cash. FS Bancorp will pay aggregate consideration of 725,585 shares of FS Bancorp common stock and $30.8 million in cash.

The merger agreement contains customary representations and warranties from both FS Bancorp and Anchor Bancorp, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of its business during the interim period between the execution of the merger agreement and the closing, including, in the case of the Anchor Bancorp, specific forbearances with respect to its business activities, (2) Anchor Bancorp’s obligation to call a meeting of its shareholders to approve the merger agreement, and, subject to certain exceptions, that its board of directors recommend that the Anchor Bancorp’s shareholders vote to approve the merger agreement, and (3) Anchor Bancorp’s non-solicitation obligations regarding alternative acquisition proposals. The merger agreement provides certain termination rights for both FS Bancorp and Anchor Bancorp and further provides that a termination fee of $2.7 million will be payable by Anchor Bancorp upon termination of the merger agreement under certain circumstances.


30

ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The completion of the merger is subject to customary conditions, including approval of the merger agreement by the Anchor Bancorp’s shareholders at a special meeting of shareholders scheduled on November 13, 2018. The required regulatory approvals have been received from the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation in connection with the proposed merger of Anchor Bancorp with and into FS Bancorp as well as the merger of Anchor Bank into 1st Security Bank. The Federal Reserve Board also granted FS Bancorp's requested waiver from its application filing requirements. The merger is expected to be completed in the fourth calendar quarter of 2018.

The foregoing description of the merger agreement does not purport to be complete and is qualified in its entirety by reference to the merger agreement, attached as Exhibit 2.1 to Anchor Bancorp’s Current Report on Form 8-K which was filed with the SEC on July 18, 2018.

Note 13 - Revenue from Contracts with Customers
As noted in Note 1, the Company adopted the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on July 1, 2018 and all subsequent ASUs that modified Topic 606.  Results for reporting periods beginning after June 30, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 605.
Revenue Recognition
In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
All of the Company’s revenue from contracts with customers in scope of ASC 606 is recognized in noninterest income and included in our commercial and consumer banking segment. For the three months ended September 30, 2018, the Company recognized $261,000 in total deposit fees, which included $191,000 of fees from non-sufficient funds, both considered in scope of ASC 606, and $888,000 of noninterest income considered not in scope of ASC 606.



31


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements, which are not statements of historical fact and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to:

the merger agreement with FS Bancorp may be terminated in accordance with its terms, and the merger may not be completed;
delays in closing our pending merger with FS Bancorp;
operating costs, customer and employee losses and business disruption related to the merger may be greater than expected;
we will be subject to business uncertainties and contractual restrictions while the merger is pending;
management time and effort will be diverted to completion of the proposed merger and merger-related matters;
termination of the merger agreement could negatively impact us;
the merger agreement requires us to pay a termination fee of $2.7 million under limited circumstances relating to alternative acquisition proposals;
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;
changes in general economic conditions, either nationally or in our market areas;
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;
secondary market conditions for loans and our ability to sell loans in the secondary market;
results of examinations of us by the Federal Deposit Insurance Corporation ("FDIC"), the Washington Department of Financial Institutions, Division of Banks ("DFI") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
our ability to attract and retain deposits;
increases in premiums for deposit insurance;
management's assumptions in determining the adequacy of the allowance for loan losses;
our ability to control operating costs and expenses;
the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation;
difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;
costs and effects of litigation, including settlements and judgments;
our ability to manage loan delinquency rates;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common stock;

32


adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q.

Some of these and other factors are discussed in our 2018 Form10-K under Item 1A. “Risk Factors.” Such developments could have an adverse impact on our financial position and results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Because of these and other uncertainties, our actual results for fiscal year 2019 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity, operating results and stock price performance.

Background and Overview

Anchor Bancorp is a bank holding company which primarily engages in the business activity of its subsidiary, Anchor Bank. Anchor Bank is a community-based savings bank primarily serving Western Washington through our 9 full-service banking offices located within Grays Harbor, Thurston, Lewis, and Pierce counties, and one loan production office located in King County, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Recently, we have been aggressively offering commercial real estate, multi-family, and construction loans primarily in Western Washington.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates also affect our net interest income. Additionally, to offset the impact of the current low interest rate environment, we are seeking other means of increasing interest income while controlling expenses. We intend to enhance the mix of our assets by further increasing our commercial business relationships which have higher risk-adjusted returns. These commercial business relationships also typically help us generate lower cost deposits. A secondary source of income is noninterest income, which includes gains on sales of assets, and revenue we receive from providing products and services. In recent years, our noninterest expense has exceeded our net interest income after provision for loan losses and we have relied primarily on fee income to supplement our net interest income.

Our operating expenses consist primarily of compensation and benefits, general and administrative, real estate owned expenses, FDIC insurance premiums, information technology, occupancy and equipment, deposit services and marketing expenses. Compensation and benefits expense consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, taxes, depreciation charges, maintenance and costs of utilities. Also included in noninterest expense are changes to the Company’s unfunded commitment reserve which are reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.


33


Critical Accounting Estimates and Related Accounting Policies

We use estimates and assumptions in our consolidated financial statements in accordance with generally accepted accounting principles. Management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the determination of the allowance for loan losses and the associated provision for loan losses, deferred income taxes and the associated income tax expense, as well as valuation of real estate owned. Management reviews the allowance for loan losses for adequacy on a monthly basis and establishes a provision for loan losses that it believes is sufficient for the loan portfolio growth expected and the loan quality of the existing portfolio. The carrying value of real estate owned is assessed on a quarterly basis. Income tax expense and deferred income taxes are calculated using an estimated tax rate and are based on management's understanding of our effective tax rate and the tax code.

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Board of Directors and management assess the allowance for loan losses on a quarterly basis. The Executive Loan Committee analyzes several different factors including delinquency rates, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, number of bankruptcies and vacancy rates of business and residential properties.

We believe that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about future losses on loans. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

Our methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits that meet the definition of impaired and a general allowance amount. The specific allowance component is determined when management believes that the collectability of a specifically identified large loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration loss that is inherent within the portfolio but has not been realized. The general allowance is determined by applying an expected loss percentage to various classes of loans with similar characteristics and classified loans that are not analyzed specifically for impairment. Because of the imprecision in calculating inherent and potential losses, the national and local economic conditions are also assessed to determine if the general allowance is adequate to cover losses. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we carried no valuation allowance at September 30, 2018. The tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available-for-sale. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from REO, deferred loan fees and costs, and loan loss reserves.

Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

Real Estate Owned. Real estate acquired through foreclosure is transferred to the real estate owned asset classification at fair value estimated fair market value less estimated costs of disposal and subsequently carried at the lower of cost or market. Any

34


impairment on the initial transfer is charged to the allowance for loan losses. Costs associated with real estate owned for maintenance, repair, property tax, etc., are expensed during the period incurred. Assets held in real estate owned are reviewed quarterly for potential impairment. When impairment is indicated the impairment is charged against current period operating results and netted against the real estate owned to reflect a net book value. At disposition any residual difference is either charged to current period earnings as a loss on sale or reflected as income in a gain on sale.

Comparison of Financial Condition at September 30, 2018 and June 30, 2018

General. Total assets increased by $9.2 million, or 2.0%, to $478.9 million at September 30, 2018 from $469.7 million at June 30, 2018. The increase in assets during this period was primarily a result of a $33.0 million, or 187.7% increase in cash and cash equivalents to $50.5 million at September 30, 2018 from $17.6 million at June 30, 2018, reflecting proceeds received from increased loan repayments. Partially offsetting the increase was a $22.7 million, or 5.8%, decrease in loans receivable, net to $369.3 million at September 30, 2018 from $392.0 million at June 30, 2018. Total liabilities increased $8.0 million, or 2.0%, to $410.2 million at September 30, 2018 compared to $402.2 million at June 30, 2018 primarily as the result of an increase in total deposits of $6.6 million, or 1.8%. In addition, we had an increase of $898,000 for advance payments by borrowers for taxes and insurance.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2018 to September 30, 2018:
  
 
Balance at September 30, 2018
 
Balance at June 30, 2018
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Cash and cash equivalents
$
50,546

 
$
17,568

 
$
32,978

 
187.7
 %
Securities, available-for-sale
16,817

 
17,725

 
(908
)
 
(5.1
)
Securities, held-to-maturity
3,287

 
3,584

 
(297
)
 
(8.3
)
Loans receivable, net of allowance for loan losses
369,291

 
392,044

 
(22,753
)
 
(5.8
)
Real estate owned, net
742

 
737

 
5

 
0.7


Cash and cash equivalents increased by $33.0 million, or 187.7%, to 50.5 million at September 30, 2018, from $17.6 million at June 30, 2018 due to an increase in deposits.

Securities available-for-sale decreased $908,000, or 5.1%, to $16.8 million at September 30, 2018 from $17.7 million at June 30, 2018. Securities held-to-maturity decreased $297,000 or 8.3%, to $3.3 million at September 30, 2018 from $3.6 million at June 30, 2018. Our securities portfolios are almost entirely comprised of mortgage-backed securities. The decreases in these portfolios were primarily the result of contractual principal repayments.

Loans receivable, net, decreased $22.8 million, or 5.8%, to $369.3 million at September 30, 2018 from $392.0 million at June 30, 2018 due primarily to a decrease in construction loans. Construction loans decreased $21.8 million, or 25.3%, to $64.1 million at September 30, 2018 from $85.9 million at June 30, 2018. There was $21.8 million in undisbursed construction loan commitments at September 30, 2018. Our construction loans are primarily for the construction of single-family properties and to a lesser extent, loans for the construction of multi-family and commercial properties. Commercial business loans decreased $7.2 million, or 35.6%, to $13.1 million at September 30, 2018 from $20.3 million at June 30, 2018. Multi-family loans decreased $1.3 million, or 2.3%, to $56.3 million at September 30, 2018 from $57.6 million at June 30, 2018. Land loans decreased $382,000, or 6.9%, to $5.1 million at September 30, 2018 from $5.5 million at June 30, 2018. These decreases were partially offset by an increase in commercial real estate loans of $6.4 million, or 4.3%, to $156.5 million at September 30, 2018 from $150.1 million at June 30, 2018. One-to-four family loans increased $1.3 million, or 2.1%, to $63.4 million at September 30, 2018 from $62.1 million at June 30, 2018. Consumer loans increased $251,000, or 1.6%, to $16.2 million at September 30, 2018 from $15.9 million at June 30, 2018.

Total delinquent loans (past due 30 days or more), decreased $500,000 to $1.5 million at September 30, 2018 from $2.0 million at June 30, 2018. Nonperforming loans, consisting solely of nonaccrual loans and primarily of one-to-four family loans, totaled $888,000 at September 30, 2018 as compared to $936,000 at June 30, 2018. Total classified loans consisting solely of

35


substandard loans decreased $48,000, or 5.1%, to $888,000 at September 30, 2018 from $936,00 at June 30, 2018. The percentage of nonperforming loans, to total loans remained the same at September 30, 2018 and June 30, 2018.

As of September 30, 2018, the Company had three REO properties with an aggregate book value of $742,000 compared to two properties with an aggregate book value of $737,000 at June 30, 2018.

Liabilities. Total liabilities increased $8.0 million between June 30, 2018 and September 30, 2018. Deposits increased $6.6 million, or 1.8%, to $365.7 million at September 30, 2018 from $359.0 million at June 30, 2018, primarily due to increases of $11.6 million in interest-bearing demand deposits, $4.3 million in noninterest bearing demand deposits, and a $2.6 million in savings deposits partially offset by decreases of $7.6 million and $4.3 million in money market accounts and in certificates of deposit, respectively. The increase in demand deposits was the result of the Bank's deposit marketing campaign, as well as other deposit gathering activities.

The following table details the changes in deposit accounts at the dates indicated:
 
Balance at September 30, 2018
 
Balance at June 30, 2018
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
59,725

 
$
55,381

 
$
4,344

 
7.8
 %
Interest-bearing demand deposits
45,623

 
34,030

 
11,593

 
34.1

Money market accounts
52,222

 
59,863

 
(7,641
)
 
(12.8
)
Savings deposits
46,869

 
44,271

 
2,598

 
5.9

Certificates of deposit
161,218

 
165,476

 
(4,258
)
 
(2.6
)
Total deposit accounts
$
365,657

 
$
359,021

 
$
6,636

 
1.8
 %

Stockholders' Equity. Total stockholders' equity increased $1.2 million, or 1.8%, to $68.7 million at September 30, 2018 from $67.4 million at June 30, 2018 primarily due to net income of $1.3 million, which was partially offset by a $117,000 increase in other comprehensive loss, net of tax.

Comparison of Operating Results for the Three Months Ended September 30, 2018 and 2017

General. Net income for the three months ended September 30, 2018 was $1.3 million or $0.52 per diluted share compared to net income of $1.0 million or $0.43 per diluted share for the three months ended September 30, 2017.

Net Interest Income. Net interest income before the provision for loan losses increased $377,000, or 8.7%, to $4.7 million for the quarter ended September 30, 2018 compared to $4.3 million for the same period last year primarily due to a 41 basis point increase in the average yield on loans receivable, net.

The Company's net interest margin increased 15 basis points to 4.29% for the quarter ended September 30, 2018 compared to 4.14% for the quarter ended September 30, 2017. The average yield on loans receivable, net, increased 41 basis points to 5.72% for the quarter ended September 30, 2018 compared to 5.31% for the same period of the prior year, reflecting rate increases. The average yield on mortgage-backed securities increased to 2.23% for the quarter ended September 30, 2018 from 2.05% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. The average yield on interest-earning assets increased 24 basis points to 5.29% from 5.05% for the quarters ended September 30, 2018 and 2017, respectively. The average cost of total deposits increased eight basis points to 1.21% for the quarter ended September 30, 2018 compared to 1.13% for the same period in the prior year. The average cost of interest-bearing liabilities increased 15 basis points to 1.29% for the quarter ended September 30, 2018 compared to 1.14% for the same period in the prior year, reflecting the increases in market interest rates over the last year.







36


The following table sets forth the changes to our net interest income for the three months ended September 30, 2018 compared to the same period in 2017. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.
 
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
 
Increase (Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable, including fees
$
400

 
$
(5
)
 
$
395

Mortgage-backed securities
9

 
(24
)
 
(15
)
Investment securities, FHLB stock and cash and cash equivalents
19

 
120

 
139

Total net change in income on interest-earning assets
$
428

 
$
91

 
$
519

Interest-bearing liabilities:
 

 
 

 


Savings deposits
$
(1
)
 
$
1

 
$

Interest-bearing demand deposits
1

 

 
1

Money market accounts
(8
)
 
(19
)
 
(27
)
Certificates of deposit
12

 
85

 
97

FHLB advances
67

 
4

 
71

Total net change in expense on interest-bearing liabilities
71

 
71

 
142

Net change in net interest income
$
357

 
$
20

 
$
377



Interest Income. Total interest income for the three months ended September 30, 2018 increased $519,000, or 9.8%, to $5.8 million from $5.3 million for the three months ended September 30, 2017. The increase during the period was primarily attributable to increases in the average yield on loans receivable, net. The average yield on loans receivable, net, increased 41 basis points to 5.72% during the three months ended September 30, 2018 compared to 5.31% for the same period in the prior year primarily due to the origination of new loans and repricing of variable rate loans at higher market interest rates. The increase during the period was also attributable to increases in the average balance and yield of cash and cash equivalents. The average balance of cash and cash equivalents, increased $25.6 million or 500.5% to $30.7 million during the quarter ended September 30, 2018 compared to the same quarter last year. The average yield on cash and cash equivalents increased 94 basis points to 1.88% during the three months ended September 30, 2018 compared to 0.94% for the same period in the prior year, primarily due to increases in the targeted federal funds interest rate. Average mortgage-backed securities declined $4.7 million to $20.7 million during the three months ended September 30, 2018 compared to the same period in the prior year. The average yield on mortgage-backed securities increased 18 basis points to 2.23% for the three months ended September 30, 2018 compared to 2.05% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. Average interest-earning assets increased $20.5 million, or 4.9%, to $440.1 million for the three months ended September 30, 2018 compared to $419.6 million for the same period in 2017.


37


The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended September 30, 2018 and 2017:

 
Three Months Ended September 30,
 
2018
 
2017
 
Increase/(Decrease) in
Interest and
Dividend
Income from
2017
 
Average
Balance
 
Yield
 
Average
Balance
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net (1)
$
386,618

 
5.72
%
 
$
387,028

 
5.31
%
 
$
395

Mortgage-backed securities
20,673

 
2.23

 
25,378

 
2.05

 
(15
)
Investment securities
154

 
5.19

 
164

 
7.32

 
(1
)
FHLB stock
2,047

 
5.28

 
1,964

 
3.87

 
8

Cash and cash equivalents
30,657

 
1.88

 
5,105

 
0.94

 
132

Total interest-earning assets
$
440,149

 
5.29
%
 
$
419,639

 
5.05
%
 
$
519

(1) 
Nonaccruing loans have been included in the table as loans carrying a zero yield for the period that they have been on nonaccrual, calculated net of deferred loan fees and loans in process.

Interest Expense. Interest expense increased $142,000, or 14.9% to $1.1 million for the three months ended September 30, 2018 as compared to $951,000 for the three months ended September 30, 2017. The increase during the period was primarily attributable to the increase in the average balance of certificates of deposit. The average balance of certificates of deposit increased $17.0 million, or 11.6%, to $163.6 million during the quarter ended September 30, 2018 compared to $146.7 million for the same quarter last year. The average balance of money market accounts decreased $15.7 million, or 21.2%, to $58.2 million for the three months ended September 30, 2018 compared to $73.9 million for the same period of the prior year, reflecting our customers' preference for higher yielding certificates of deposit. Average interest-bearing liabilities increased $5.3 million, or 1.6%, to $338.8 million for the three months ended September 30, 2018 compared to $333.5 million for the same period in 2017 primarily due to the increase in deposits.

The following table details average balances, cost of funds and the change in interest expense for the three months ended September 30, 2018 and 2017:

 
Three Months Ended September 30,
 
2018
 
2017
 
Increase/(Decrease) in
Interest Expense from
2017
 
Average
Balance
 
Cost
 
Average
Balance
 
Cost
 
 
(Dollars in thousands)
Savings deposits
$
46,088

 
0.15
%
 
$
44,176

 
0.15
%
 
$

Interest-bearing demand deposits
33,857

 
0.05

 
32,977

 
0.04

 
1

Money market deposits
58,235

 
0.43

 
73,922

 
0.48

 
(27
)
Certificates of deposit
163,643

 
2.03

 
146,678

 
2.00

 
97

FHLB advances
37,000

 
1.95

 
35,772

 
1.22

 
71

Total interest-bearing liabilities
$
338,823

 
1.29
%
 
$
333,525

 
1.14
%
 
$
142


Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that a $50,000 provision for loan losses was required for the three months ended September 30, 2018 compared to $75,000 for the same period last year, primarily reflecting loan credit quality and a decrease in our loan portfolio.



38


Nonperforming loans decreased to $888,000 at September 30, 2018, a decrease of $576,000 from $1.5 million at September 30, 2017. The ratio of nonperforming loans to total loans was 0.2% at September 30, 2018 compared to 0.4% at September 30, 2017. Total classified loans decreased $719,000, or 44.7%, to $888,000 at September 30, 2018 from $1.6 million at September 30, 2017. The allowance for loan losses of $4.4 million at September 30, 2018 represented 1.2% of total loans receivable and 497.8% of nonperforming loans. This compares to an allowance for loan losses of $4.4 million at June 30, 2018, representing 1.1% of total loans receivable and 466.9% of nonperforming loans.

Management considers the allowance for loan losses at September 30, 2018 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by our regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

The following table details activity and information related to the allowance for loan losses at and for the three months ended September 30, 2018 and 2017:

 
At or For the Three Months Ended September 30,
 
 
2018
 
2017
 
(Dollars in thousands)
Provision for loan losses
$
50

 
$
75

Net charge-offs

 
164

Allowance for loan losses
4,420

 
4,017

Allowance for loan losses as a percentage of gross loans receivable at the end of the period
1.2
%
 
1.0
%
Nonaccrual and 90 days or more past due and still accruing interest
$
888

 
$
1,464

Allowance for loan losses as a percentage of nonperforming loans at the end of the period
497.8
%
 
274.4
%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period
0.2
%
 
0.4
%
Total loans
$
374,626

 
$
388,532



We continue to restructure our delinquent loans, when appropriate, so our borrowers can continue to make payments while minimizing the Company's potential loss. As of September 30, 2018 and September 30, 2017, we have identified 22 and 25 loans, respectively, with aggregate net principal balances of $3.0 million and $4.3 million, respectively, as TDRs. At September 30, 2018 and September 30, 2017, there were $217,000 and $241,000, respectively, of TDRs included in nonperforming loans. At September 30, 2018 the Company had REO with a book value of $742,000 compared to $737,000 at June 30, 2018.















39


Noninterest Income. Noninterest income decreased $23,000, or 2.0%, to $1.1 million for the quarter ended September 30, 2018 compared to $1.2 million for the same period a year ago. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended September 30, 2018 compared to the same period in 2017:

 
Three Months Ended September 30,
 
Increase (decrease)
 
 
 
2018
 
2017
 
Amount
 
Percent
 
(Dollars in thousands)
Deposit service fees
$
261

 
$
313

 
$
(52
)
 
(16.6
)%
Other deposit fees
194

 
199

 
(5
)
 
(2.5
)
Other loan fees
226

 
228

 
(2
)
 
(0.9
)
Gain on sale of loans
(2
)
 
110

 
(112
)
 
(101.8
)
Bank owned life insurance investment
129

 
129

 

 

Other income
341

 
193

 
148

 
76.7

Total noninterest income
$
1,149

 
$
1,172

 
$
(23
)
 
(2.0
)%

The decrease in noninterest income is primarily attributable to the $112,000, or 101.8%, decrease in sale of loans in the quarter ended September 30, 2018 to a loss of $2,000 compared to a gain of $110,000 for the same quarter a year ago due to no loan sales during the current quarter. The decrease was offset by an increase in other income of $148,000, or 76.7%, to $341,000, compared to the same quarter a year ago primarily due to $242,000 of prepayment penalties in the current quarter. Deposit service fees decreased $52,000, or 16.6% for the quarter ended September 30, 2018 compared to the same quarter last year due to our Shelton branch closure.

Noninterest Expense. For the three months ended September 30, 2018, noninterest expense increased $48,000, or 1.2%, to $4.0 million from $3.9 million for the three months ended September 30, 2017. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended September 30, 2018 and 2017:

 
Three Months Ended September 30,
 
Increase (decrease)
 
 
 
2018
 
2017
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
1,962

 
$
2,084

 
$
(122
)
 
(5.9
)%
General and administrative expenses
580

 
574

 
6

 
1.0

Merger expenses
266

 
34

 
232

 
682.4

Real estate impairment
50

 

 
50

 

Real estate holding costs
20

 
30

 
(10
)
 
(33.3
)
FDIC insurance premiums
47

 
36

 
11

 
30.6

Information technology
498

 
537

 
(39
)
 
(7.3
)
Occupancy and equipment
398

 
433

 
(35
)
 
(8.1
)
Deposit services
96

 
104

 
(8
)
 
(7.7
)
Marketing
59

 
91

 
(32
)
 
(35.2
)
Loss on sale of property, premises and equipment

 
5

 
(5
)
 
(100.0
)
Total noninterest expense
$
3,976

 
$
3,928

 
$
48

 
1.2
 %

The increase was primarily due to a $232,000 increase in merger expenses due to our pending merger with FS Bancorp and a $50,000 REO impairment on a single-family property to reflect its fair market value. These increases were partially offset by a $122,000, or 5.9% decrease in, compensation expense and smaller decreases in nearly all other noninterest expenses. The decrease in compensation expense was primarily due to reduced staffing resulting from our Shelton branch closure and a $35,000 reduction in stock based compensation awarded under the Anchor Bancorp 2015 Equity Plan to $12,000 for the quarter ended September 30, 2018 from $47,000 for the quarter ended September 30, 2017.

40



Income Taxes. The provision for income taxes was $559,000 for the three months ended September 30, 2018, compared to $471,000 for the three months ended September 30, 2017, respectively. Since the Company has a fiscal year end of June 30th, the reduced federal corporate income tax rate from the Tax Act for fiscal year 2018 was the result of the application of a blended federal statutory tax rate of 28% and is now a flat 21% federal corporate income tax rate for fiscal 2019 and thereafter.
As a result, the effective federal and state income tax rate was 30% for the three months ended September, 2018 compared to 31% for the three months ended September 30, 2017.

At September 30, 2018, the Company had a net deferred tax asset of $3.2 million compared to $3.6 million at June 30, 2018. As of September 30, 2018, management deemed that a net deferred tax asset valuation allowance related to the Company’s deferred tax asset was not necessary.

Liquidity, Commitments and Capital Resources

Liquidity. We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound operation. Historically, we have maintained cash flow above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a monthly basis, we review and update cash flow projections to ensure that adequate liquidity is maintained.

Our primary sources of funds are from customer deposits, loan repayments, loan sales, investment payments, maturing investment securities and advances from the FHLB of Des Moines. These funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition.

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At September 30, 2018, the total approved loan origination commitments outstanding were $581,000 and undisbursed construction loan commitments totaled $21.8 million. At the same date, unused lines of credit were $40.3 million.

For purposes of determining our liquidity position, we use the liquidity ratio, a regulatory measure of liquidity calculated as the total of net cash, short-term, and marketable assets divided by net deposits and short-term liabilities. Our Board of Directors has established a liquidity ratio target of 10%. For the three months ended September 30, 2018, our average liquidity ratio was 14.2%, which indicates we were above the liquidity standard set by our Board. Management believes the Bank's current liquidity position is adequate to meet foreseeable short and long term liquidity requirements.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or mortgage-backed securities. On a longer-term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed securities and investment securities.

Certificates of deposit scheduled to mature in one year or less at September 30, 2018 totaled $79.5 million. We had one brokered certificate of deposit for $5.0 million at September 30, 2018. Management's policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with us. In addition, we had the ability to borrow an additional $168.1 million from the FHLB of Des Moines. We also have a line of credit with the Federal Reserve Bank of San Francisco for $1.0 million which is collateralized with securities and a line of credit with Pacific Coast Bankers' Bank under which we have the ability to borrow an additional $5.0 million.

We measure our liquidity based on our ability to fund assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices, or in a reasonable time frame, to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and liabilities to manage effectively our liquidity and funding requirements.

Our primary source of funds is the Bank's deposits. When deposits are not available to provide the funds for our assets, we use alternative funding sources. These sources include, but are not limited to: cash management from the FHLB of Des Moines, wholesale funding, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term alternatives. Alternatively, we may also liquidate assets to meet our funding needs. On a monthly basis, we estimate our

41


liquidity sources and needs for the coming three-month, nine-month, and one-year time periods. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset Liability Management Committee in forecasting funding needs and investing opportunities.

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the three month period ended September 30, 2018, the Bank did not pay a dividend to the Company. At September 30, 2018, the Company (on an unconsolidated basis) had liquid assets of $2.9 million.

Commitments and Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of our customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Collateral is not required to support commitments.

Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit.

Commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of September 30, 2018:
 
 
Amount of Commitment
Expiration Per Period
 
Total Amounts
Committed (2)
 
Due in
One Year
 
(In thousands)
Commitments to originate loans (1)
$
581

 
$
581

Undisbursed portion of construction loans
21,752

 
21,752

Total loan commitments
$
22,333

 
$
22,333

 
 
 
 
Lines of credit
 
 
 

Fixed rate (3)
$
12,608

 
$
4,306

Adjustable rate
27,649

 
13,351

Undisbursed balance of lines of credit
$
40,257

 
$
17,657


(1) 
Interest rates on fixed rate loans are 5.74% to 6.75%. 
(2) 
At September 30, 2018 there was $195 in reserves for unfunded commitments. 
(3) 
Includes standby letters of credit. 






42


Operating lease commitment - The Bank leases space for a branch located in Puyallup, Washington. This lease runs for five years with the current lease expiring in 2020. The lease requires the Bank to pay all taxes, maintenance, and utility costs, as well as maintain certain types of insurance. The annual lease commitment for the next two years is as follows:
Year Ended June 30,
 
 
 
Amount
 
 
(In thousands)
2019
 
$64
2020
 
$37


Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards. As of September 30, 2018, the Bank exceeded all regulatory capital requirements with, Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital (CET1), Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios of 13.9%, 17.1%, 17.1%, and 18.2%, respectively. As of June 30, 2018 these ratios were 13.5%, 15.5%, 15.5%, and 16.6%, respectively. At September 30, 2018, the Bank met the requirements to be deemed "well-capitalized" under applicable regulatory guidelines.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at an amount more than 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount more than to 2.5% of risk-weighted assets in January 2019. As of September 30, 2018, the conservation buffer was an amount more than 1.875%.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, CET1, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 14.8%, 18.1%, 18.1%, and 19.3%, respectively, as of September 30, 2018. As of June 30, 2018, these ratios were 14.4%, 16.6%, 16.6% and 17.7%, respectively.

The Bank's actual capital amounts and ratios at September 30, 2018 are presented in the following table:

Anchor Bank
 
 
 
 
Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
 
 
 
Minimum Capital Requirement
 
 
Actual
 
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Total capital
(to risk-weighted assets)
$
70,162

 
18.2
%
 
$
30,805

 
8.0
%
 
$
38,506

 
10.0
%
Tier I capital
(to risk-weighted assets)
$
65,742

 
17.1
%
 
$
23,103

 
6.0
%
 
$
30,805

 
8.0
%
Common equity tier 1 capital (to risk-weighted assets)
$
65,742

 
17.1
%
 
$
17,328

 
4.5
%
 
$
25,029

 
6.5
%
Tier I leverage capital
(to average assets)
$
65,742

 
13.9
%
 
$
18,923

 
4.0
%
 
$
23,654

 
5.0
%
 







43



The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of September 30, 2018, were as follows:

Anchor Bancorp
Actual
 
Amount
 
Ratio
 
(Dollars in thousands)
September 30, 2018
 
 
 
Total capital
(to risk-weighted assets)
$
74,328

 
19.3
%
Tier I capital
(to risk-weighted assets)
$
69,908

 
18.1
%
Common equity tier 1 capital (to risk-weighted assets)
$
69,908

 
18.1
%
Tier I leverage capital
(to average assets)
$
69,908

 
14.8
%


44


Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

General. Our Board of Directors has established an asset and liability management policy to guide management in maximizing net interest rate spread by managing the differences in terms between interest-earning assets and interest-bearing liabilities while maintaining acceptable levels of liquidity, capital adequacy, interest rate sensitivity, changes in net interest income, credit risk and profitability. The policy includes the use of an Asset Liability Management Committee whose members include certain members of senior management. The Committee’s purpose is to communicate, coordinate and manage our asset/liability positions consistent with our business plan and Board-approved policies. The Asset Liability Management Committee meets monthly to review various areas including:

economic conditions;
interest rate outlook;
asset/liability mix;
interest rate risk sensitivity;
change in net interest income;
current market opportunities to promote specific products;
historical financial results;
projected financial results; and
capital position.

The Committee also reviews current and projected liquidity needs monthly. As part of its procedures, the Asset Liability Management Committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential change in market value of portfolio equity that is authorized by the Board of Directors.

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

In recent years, we primarily have utilized the following strategies in our efforts to manage interest rate risk we have:

increased our originations of shorter term loans and particularly, home equity loans (limited recent originations) and commercial business loans;
structured certain borrowings with maturities that match fund our loan portfolios; and
sold our fixed rate single family loans to generate noninterest income as well as managing interest rate risk.

How We Measure the Risk of Interest Rate Changes. We measure our interest rate sensitivity on a quarterly basis utilizing an internal model. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual experience differs from such assumptions. The assumptions we use are based upon proprietary and market data and reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. An independent service was used to provide market rates of interest and certain interest rate assumptions to determine prepayments and maturities of loans, investments and borrowings and decay rates on deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We assumed that non-maturity deposits can be maintained with rate adjustments not directly proportionate to the change in market interest rates.

In the past, we have demonstrated that the tiering structure of our deposit accounts during changing rate environments results in relatively low volatility and less than market rate changes in our interest expense for deposits. Our deposit accounts are tiered by balance and rate, whereby higher balances within an account earn higher rates of interest. Therefore, deposits that are not very rate sensitive (generally, lower balance tiers) are separated from deposits that are rate sensitive (generally, higher balance tiers).

45



We generally have found that a number of our deposit accounts are less rate sensitive than others. Thus, when interest rates increase, the interest rates paid on these deposit accounts do not require a proportionate increase in order for us to retain them. These assumptions are based upon an analysis of our customer base, competitive factors and historical experience. The following table shows the change in our net portfolio value at September 30, 2018 that would occur upon an immediate change in interest rates based on our assumptions, but without giving effect to any steps that we might take to counteract that change. The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
 
 
Net Portfolio Value
 
Net Portfolio as % of Portfolio Value of Assets
 
 
Basis Point Change in Rates
 
 
 
Market Value of Assets (4)
 
Amount
 
$ Change (1)
 
% Change
 
NPV Ratio (2)
 
% Change (3)
 
 
 
(Dollars in thousands)
300
 
$
67,069

 
$
(961
)
 
(1.41
)%
 
15.14
%
 
0.51
 %
 
$
443,030

200
 
67,933

 
(97
)
 
(0.14
)
 
15.08

 
0.45

 
450,517

100
 
68,213

 
183

 
0.27

 
14.90

 
0.27

 
457,744

Base
 
68,030

 

 

 
14.63

 

 
464,851

(100)
 
66,501

 
(1,529
)
 
(2.25
)
 
14.10

 
(0.53
)
 
471,551

___________
(1) 
Represents the increase (decrease) in the estimated net portfolio value at the indicated change in interest rates compared to the net portfolio value assuming no change in interest rates.
(2) 
Calculated as the net portfolio value divided by the market value of assets (“net portfolio value ratio”).
(3) 
Calculated as the increase (decrease) in the net portfolio value ratio assuming the indicated change in interest rates over the estimated net portfolio value ratio assuming no change in interest rates.
(4) 
Calculated based on the present value of the discounted cash flows from assets. The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity of those assets to interest rate changes.

The following table illustrates the change in net interest income that would occur in the event of an immediate change in interest rates at September 30, 2018, but without giving effect to any steps that might be taken to counter the effect of that change in interest rates.

Basis Point Change in Rates
 
Net Interest Income
 
Amount
 
$ Change (1)
 
% Change
 
 
(Dollars in thousands)
300
 
$
21,617

 
$
1,630

 
8.2
 %
200
 
21,106

 
1,119

 
5.6

100
 
20,563

 
576

 
2.9

Base
 
19,987

 

 

(100)
 
19,125

 
(862
)
 
(4.3
)

(1)    Represents the increase (decrease) of the estimated net interest income at the indicated change in interest rates compared to net interest income assuming no change in interest rates.

We use certain assumptions in assessing our interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in the market interest rates. Also, the interest rates on certain types of assets and liabilities may

46


fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer, and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2018, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Company’s financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2018.


47


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

(c) There were no repurchases of the Company's outstanding shares during the quarter ended September 30, 2018 and at September 30, 2018, no shares were authorized to be purchased under a publicly announced plan.


Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.


48


Item 6. Exhibits
2.1
2.2
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.8
10.9
10.10
10.11
10.12
31.1
31.2
32
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements



(1)
Filed as an exhibit to the Company's Current Report on Form 8-K filed July 17, 2018.
(2)
Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 on October 24, 2008 (File No.333-154734).
(3)
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 10, 2015.
(4)
Filed as an exhibit to the Company's Current Report on Form 8-K filed May 22, 2014.
(5)
Filed as an exhibit to the Company's Current Report on Form 8-K filed January 22, 2015.
(6)
Filed as an exhibit to the Company's Registration Statement on Form S-8 dated December 8, 2015.



49


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ANCHOR BANCORP
 
 
Date: November 5, 2018
/s/Jerald L. Shaw                                           
 
Jerald L. Shaw 
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Date: November 5, 2018
/s/Terri L. Degner                                        
 
Terri L. Degner
 
Executive Vice President and 
 
Chief Financial Officer 
 
(Principal Financial and Accounting Officer)

50



EXHIBIT INDEX

31.1
31.2
32
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements


51